PE navigates a more complex geopolitical and macroeconomic environment: EY analysis

• Selectivity increases amid geopolitical uncertainty and AI-led disruption
• Deal value declined in Q1 2026, but last twelve months show sustained strength
• Investor focus shifts toward resilience, operational value creation, and asset-backed sectors

Global private equity (PE) activity moderated in the first quarter of 2026 as shifting geopolitical conditions and rapid technological change prompted a more cautious and selective investment environment, according to the latest EY Private Equity Pulse Q1 2026.

After entering the year with strong momentum, supported by accelerating activity in the second half of 2025, PE firms adjusted their approach as volatility returned to the market. Investor sentiment recalibrated amid geopolitical developments in the Middle East and, more significantly, growing scrutiny of AI-related disruption within the software sector.

In aggregate, PE firms announced 110 deals valued at US$172b in Q1 2026, representing a 12% decline by value year-on-year, as underwriting discipline tightened and capital became more concentrated around higher-quality opportunities. Financing markets reflected similar caution, with wider spreads, softer retail demand, and a greater premium placed on resilient credit quality.

Ivan Lehon, EY Global Private Equity Leader, says:

“After a strong finish to 2025, the market entered this year with confidence - investors are now reassessing risk as geopolitical uncertainty and rapid advances in AI reshape the opportunity set. What we are seeing is not a withdrawal of capital, but a much sharper focus on where firms have conviction, differentiation, and the ability to drive value through active ownership.”

Underlying momentum remains intact

Despite the slower start to 2026, underlying market strength remains evident. Over the last twelve months, PE firms have announced more than US$900b in deals, marking a 34% increase on the previous 12 months.

Ivan says: “This sustained deployment highlights the resilience of the asset class and continued confidence in private equity’s ability to execute investment strategies in a complex macroeconomic environment.”

AI reshapes software investment strategies

A defining feature of the current cycle is a pronounced shift in sentiment toward technology, particularly software. While technology accounted for approximately 30% of global PE deployment by value last year, that figure fell sharply to 12% in Q1 2026. Without this pullback in tech investment, overall PE deployment would have increased year-on-year.

The EY PE Pulse indicates that nearly two-thirds of general partners are pursuing a more targeted investment approach, focusing on areas where they have deep sector expertise, while around 60% report increasing diligence on AI disruption risk. Many firms are reassessing business models, competitive moats, and long-term value creation in light of rapidly evolving AI capabilities, even as others invest selectively in AI-native and AI-enabled platforms.

Rotation toward asset-backed sectors gains pace

Alongside evolving views on software, investors are gradually shifting toward more asset-heavy sectors. Infrastructure, utilities, and energy attracted increased attention in the first quarter, with 13 utility and energy deals announced for a total value of US$67b, the highest level ever recorded in a single quarter.

This shift reflects a broader preference for assets offering tangible cash flows, inflation-linked characteristics, and downside protection at a time when expectations for a higher-for-longer interest rate environment continue to build. Real estate is also re-emerging selectively, particularly in segments such as logistics, data centers, and residential assets supported by long-term structural demand.

Exits remain steady despite slower volumes

Exit activity totalled US$171b in Q1 2026, broadly in line with trends over the past twelve months, despite a decline from Q4 levels. Trade sales accounted for US$121b of exit value, followed by US$45b in secondaries and US$5b from IPOs. Transaction volumes fell 29%, to 95 deals, reflecting a more curated approach to bringing assets to market.

Pete Witte, EY Global Private Equity Analyst Lead, says:

“While volumes have moderated, exits remain remarkably steady given the current backdrop. Firms are being thoughtful about timing and pathways, but continued activity in trade sales and secondaries shows that liquidity mechanisms are functioning. Returns are increasingly being driven by operational performance rather than valuation uplift.”

Outlook remains stable amid external risks

Looking ahead, survey respondents identify geopolitical developments as the leading external risk to portfolio performance over the next 12 to 24 months, followed by exit timing considerations. Despite these concerns, expectations for earnings growth and topline performance remain broadly stable, underscoring continued confidence in portfolio resilience and operational value creation.

Ivan says: “Although expectations for multiple expansion are more measured, the data points to the enduring strength of the PE model, particularly its ability to withstand uncertainty through active ownership, rigorous underwriting, and strategic flexibility.”

-ENDS-

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